Exhibit 99.4 Audited Financial Statements for CytoDyn, Inc. for the period
October 28, 2003 (inception) through May 31, 2006
CYTODYN, INC.
(A Development Stage Company)
Index to Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm................... F-2
Balance Sheet at May 31, 2006............................................. F-3
Statements of Operations for the years ended May 31, 2006 and 2005
and the period from October 28, 2003 (inception) through May 31, 2006... F-4
Statement of Changes in Shareholders' Deficit for the period
from June 1, 2003 through May 31, 2006.................................. F-5
Statements of Cash Flows for the years ended May 31, 2006 and 2005
and the period from October 28, 2003 (inception) through May 31, 2006... F-6
Notes to Financial Statements............................................. F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
CytoDyn, Inc.:
We have audited the accompanying balance sheet of CytoDyn, Inc. (a development
stage company) as of May 31, 2006, and the related statements of operations,
changes in shareholders' deficit, and cash flows for the years ended May 31,
2006 and May 31, 2005 and the period from October 28, 2003 (inception) through
May 31, 2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CytoDyn, Inc. as of May 31,
2006, and the results of its operations and its cash flows for the years ended
May 31, 2006 and May 31, 2005 and the period from October 28, 2003 (inception)
through May 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered significant operating losses since
inception, which raises a substantial doubt about its ability to continue as a
going concern. Management's plans in regard to this matter are described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Cordovano and Honeck, LLP
Englewood, Colorado
September 1, 2006
F-2
CYTODYN, INC.
(A Development Stage Company)
Balance Sheet
May 31, 2006
Assets
Current Assets:
Cash ...................................................... $ 125,320
Prepaid expenses .......................................... 303,160
-----------
Total current assets ........................ 428,480
Furniture and equipment, less accumulated
depreciation of $2,204 (Note 2) ........................... 2,334
Intangible asset, less accumulated
amortization of $1,722 (Note 3) ........................... 1,128
Deposit ....................................................... 495
-----------
$ 432,437
===========
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable .......................................... $ 110,267
Accrued liabilities ....................................... 133,588
Accrued interest payable .................................. 5,267
Notes payable, net (Note 4) ............................... 23,863
Derivative liability (Note 5) ............................. 75,456
Indebtedness to related parties (Note 6) .................. 393,360
-----------
Total current liabilities ................... 741,801
Commitments and contingencies (Note 9) ........................ 150,000
-----------
Total liabilities ........................... 891,801
-----------
Shareholders' deficit (Note 7):
Preferred stock, no par value; 5,000,000 shares authorized,
-0- shares issued and outstanding ...................... --
Common stock, no par value; 20,000,000 shares authorized,
9,147,664 shares issued and outstanding ................ 3,062,566
Additional paid-in capital ................................ 834,809
Accumulated deficit ....................................... (1,601,912)
Deficit accumulated during development stage .............. (2,754,827)
-----------
Total shareholders' deficit ................. (459,364)
-----------
$ 432,437
===========
See accompanying notes to financial statements
F-3
CYTODYN, INC.
(A Development Stage Company)
Statements of Operations
October 28,
For the Year Ended 2003
May 31, (Inception)
-------------------------- through
2006 2005 May 31, 2006
----------- ----------- ------------
Operating expenses:
General and administrative
(Net of $537,552, $11,928, and
$549,480, respectively, stock-based
compensation) (Note 7) .............. $ 619,564 $ 373,342 $ 1,310,586
Stock-based compensation ............... 537,552 11,928 549,480
Research and development ............... -- 362,342 362,342
Legal fees, related party (Note 6) ..... 20,800 25,900 66,750
Litigation (Note 9) .................... 150,000 -- 150,000
Depreciation ........................... 2,101 1,671 3,976
----------- ----------- ------------
Total operating expenses 1,330,017 775,183 2,443,134
----------- ----------- ------------
Operating loss ......... (1,330,017) (775,183) (2,443,134)
Interest income ............................ 101 234 678
Interest expense ........................... (112,846) (2,134) (115,433)
Gain on derivative liability (Note 5) ...... 159,094 -- 159,094
Loss on debt extinguishment (Note 5) ....... (356,032) -- (356,032)
----------- ----------- ------------
Loss before income taxes (1,639,700) (777,083) (2,754,827)
Income tax provision (Note 8) .............. -- -- --
----------- ----------- ------------
Net loss ............... $(1,639,700) $ (777,083) $ (2,754,827)
=========== =========== ============
Basic and diluted loss per share ........... $ (0.19) $ (0.12)
=========== ===========
Basic and diluted weighted average
common shares outstanding .............. 8,639,483 6,557,362
=========== ===========
See accompanying notes to financial statements
F-4
CYTODYN, INC.
(A Development Stage Company)
Statements of Changes in Shareholders' Deficit
Deficit
Accumulated
Preferred Stock Common Stock Additional During
---------------------- ---------------------- Paid-in Accumulated Development
Shares Amount Shares Amount Capital Deficit Stage Total
---------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Balance at October 28, 2003,
following recapitalization .. -- $ -- 6,252,640 $1,425,334 $ 23,502 $(1,594,042) $ -- $ (145,206)
February through April 2004,
sale of common stock less
offering costs of $54,000
($.30/share) (Note 7) ....... -- -- 1,800,000 486,000 -- -- -- 486,000
February 2004, shares issued
to former officer as
payment for working capital
advance ($.30/share) ........ -- -- 16,667 5,000 -- -- -- 5,000
Net loss, year ended
May 31, 2004 ................ -- -- -- -- -- (7,870) (338,044) (345,914)
---------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Balance at May 31, 2004 ...... -- -- 8,069,307 1,916,334 23,502 (1,601,912) (338,044) (120)
July 2004, capital
contribution by an officer .. -- -- -- -- 512 -- -- 512
November 2004, common stock
warrants granted (Note 7) ... -- -- -- -- 11,928 -- -- 11,928
February 2005, capital
contribution by an officer .. -- -- -- -- 5,000 -- -- 5,000
Net loss, year ended
May 31, 2005 ................ -- -- -- -- -- -- (777,083) (777,083)
---------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Balance at May 31, 2005 ...... -- -- 8,069,307 1,916,334 40,942 (1,601,912) (1,115,127) (759,763)
June through July 2005,
sale of common stock less
offering costs of $27,867
($0.75/share) (Note 7) ...... -- -- 289,890 189,550 -- -- -- 189,550
August 2005, common shares
issued to extinguish
promissory notes payable
and related interest
($0.75/share) (Note 4) ...... -- -- 160,110 120,082 -- -- -- 120,082
May 2006, common shares
issued to extinguish
convertible debt (Note 4) ... -- -- 350,000 437,500 -- -- -- 437,500
November 2005, 94,500
warrants exercised
($0.30/share) (Note 7) ...... -- -- 94,500 28,350 -- -- -- .28,350
January through April 2006,
common shares issued for
services (Note 7) ........... -- -- 183,857 370,750 -- -- -- 370,750
January through June 2006,
warrants issued with
convertible debt (Note 4) ... -- -- -- -- 274,950 -- -- 274,950
March through May 2006,
stock options granted to
consultants (Note 7) ........ -- -- -- -- 432,576 -- -- 432,576
March 2006, stock options
issued to extinguish debt
(Note 4) .................... . -- -- -- -- 86,341 -- -- 86,341
Net loss, year ended
May 31, 2006 ................ . -- -- -- -- -- -- (1,639,700) (1,639,700)
---------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Balance at May 31, 2006 ...... . -- $ -- 9,147,664 $3,062,566 $ 834,809 $(1,601,912) $(2,754,827) $ (459,364)
========== ========== ========== ========== ========== =========== =========== ===========
See accompanying notes to financial statements
F-5
CYTODYN, INC.
(A Development Stage Company)
Statements of Cash Flows
October 28,
For the Year Ended 2003
May 31, (Inception)
-------------------------- through
2006 2005 May 31, 2006
----------- ----------- ------------
Cash flows from operating activities:
Net loss ...................................... $(1,639,700) $ (777,083) $(2,754,827)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation .............................. 2,101 1,671 3,976
Gain on derivative liability .............. (159,094) -- (159,094)
Loss on debt extinguishment ............... 356,032 -- 356,032
Stock-based compensation (Note 6) ......... 537,552 11,928 549,480
Changes in current assets and liabilities:
Increase in prepaid expenses ........... (4,759) (25,039) (46,100)
Increase in deposits ................... -- -- (495)
Increase in accounts payable
and accrued liabilities .............. 305,794 93,844 389,510
----------- ----------- -----------
Net cash used in
operating activities ......... (602,074) (694,679) (1,661,518)
----------- ----------- -----------
Cash flows from investing activities:
Equipment purchases ........................... (936) (3,167) (7,438)
----------- ----------- -----------
Net cash used in
investing activities ......... (936) (3,167) (7,438)
----------- ----------- -----------
Cash flows from financing activities:
Capital contributions by officer .............. -- 5,512 5,512
Proceeds from notes payable issued to
related parties (Note 5) .................... -- 385,300 501,126
Proceeds from notes payable issued to
individuals (Note 4) ........................ 509,500 121,000 580,500
Proceeds from the sale of common stock (Note 6) 245,767 -- 785,767
Payment of offering costs (Note 6) ............ (27,867) -- (81,867)
----------- ----------- -----------
Net cash provided by
financing activities ......... 727,400 511,812 1,791,038
----------- ----------- -----------
Net change in cash ........... 124,390 (186,034) 122,082
Cash, beginning of period ......................... 930 186,964 3,238
----------- ----------- -----------
Cash, end of period ............................... $ 125,320 $ 930 $ 125,320
=========== =========== ===========
Supplemental disclosure of cash flow information:
Income taxes .................................. $ -- $ -- --
=========== =========== ===========
Interest ...................................... $ -- $ 234 $ 687
=========== =========== ===========
Non-cash investing and financing transactions:
Net assets acquired in exchange for common
stock in CytoDyn/Rexray business
combination (Note 1) ...................... $ -- $ -- $ 7,542
=========== =========== ===========
Common stock issued to former officer to
repay working capital advance ............. $ -- $ -- 5,000
=========== =========== ===========
Common stock issued for debt (Note 4) ....... $ 120,082 $ -- $ 120,082
=========== =========== ===========
Options to purchase common stock issued
for debt (Note 7) ......................... $ 86,341 $ -- $ 86,341
=========== =========== ===========
Common stock issued for convertible
debt (Note 4) ............................. $ 437,000 $ -- $ 437,000
=========== =========== ===========
See accompanying notes to financial statements
F-6
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
Organization and Basis of Presentation
CytoDyn, Inc. (the "Company") was incorporated under the laws of Colorado on May
2, 2002 under the name Rexray Corporation ("Rexray"). The Company entered the
development stage effective October 28, 2003 and follows Statements of Financial
Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by Development
Stage Enterprises".
The Company plans to develop therapeutic agents for use against the disease
associated with Human Immunodeficiency Virus ("HIV"). The Company intends to
develop and obtain FDA approval for the use of monoclonal antibodies to treat
patients with HIV by protecting the cells of the body's immune system that are
otherwise killed by the disease. The Company is continuing the research and
development of a treatment for HIV, using technology licensed to it by the
Company's president, and may either repeat Phase I trials, if necessary for
non-clinical reasons, or with FDA approval, conduct a Phase II(b) study. The
Company has not derived any revenues from the licensed technology, but the
Company is planning to pursue further clinical trials.
Also the Company acquired a wholly owned subsidiary. Advanced Influenza
Technologies Inc (AITI) which has licensed a portfolio of patents from the
University of Massachusetts for the development of a family of plasmid-DNA
products to protect human subjects against several strains of influenza (the
flu). The University has until 1 year from the effective date of the contract to
manufacture, successfully test, and deliver to AITI three "seeds" that can be
used for the commercial manufacturing of plasmid-DNA products or, in the
alternative, a single polyvalent product, depending upon what the FDA might
require. In the event the University fails to make timely delivery of these
seeds, AITI could then abandon the project with no further financial obligations
or could continue with a different timeline.
CytoDyn is also negotiating with Kings College in London, England for the
formulation of Formaxycin(TM) as a topical dermatological product to improve the
appearance of human skin by eliminating dysplastic conditions.
On October 27, 2003, Rexray changed its name to CytoDyn, Inc.
Acquisition Agreement
- ---------------------
On October 28, 2003, Rexray, the former Securities and Exchange Commission
("SEC") Registrant, entered into an Acquisition Agreement (the "Agreement") with
CytoDyn of New Mexico, Inc. ("CytoDyn NM"), a company incorporated under the
laws of New Mexico on June 4, 1994. Under the terms of the Agreement, Rexray
agreed to acquire some of the assets of CytoDyn NM in exchange for 5,362,640
shares of its common stock. Following the acquisition, the former shareholders
of CytoDyn NM held approximately 85.8 percent of the Company's outstanding
common stock, resulting in a change in control. However, for accounting
purposes, the acquisition has been treated as a recapitalization of CytoDyn NM,
with Rexray the legal surviving entity. Since Rexray had minimal assets and no
operations, the recapitalization has been accounted for as the sale of 890,000
shares of CytoDyn NM common stock for the net assets of Rexray. Therefore, the
historical financial information prior to the date of the reverse business
acquisition is the financial information of CytoDyn NM.
Prior to the Agreement, both Rexray and CytoDyn NM had insignificant operations
and were not devoting efforts to establishing a business. Following the
Agreement, the Company began devoting substantially all efforts to establishing
a new business, but planned principal operations have not yet commenced. As a
result, the Company's inception into the development stage has been established
at October 28, 2003 and, in accordance with SFAS No. 7, the accompanying
financial statements report cumulative financial information from the date of
its inception into the development stage.
F-7
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Under the terms of the Agreement, CytoDyn NM:
o Assigned the patent license agreement between CytoDyn NM and
Allen D. Allen covering United States patent numbers 5424066,
5651970, and 6534057, and related foreign patents and patents
pending, for a method of treating HIV disease with the use of
monoclonal antibodies;
o Assigned its trademarks, CytoDyn and Cytolin, and related
trademark symbol; and
o Paid $10,000 in cash
In consideration for the above, the Registrant:
o Effected a one-for-two reverse split of its common stock;
o Issued 5,362,640 shares of its common stock to the shareholders
of CytoDyn NM;
o Amended its Articles of Incorporation to change its name to
CytoDyn, Inc.; and
o Accepted $161,578 in liabilities related to the assigned assets
Going Concern
- -------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company is currently in the development stage with
losses for all periods presented. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to obtain additional operating
capital, complete development of its medical treatment, obtain FDA approval,
outsource manufacturing of the treatment, and ultimately to attain
profitability. The Company intends to seek additional funding through equity
offerings to fund its business plan. There is no assurance that the Company will
be successful.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less when acquired, to be cash equivalents. The
Company had no cash equivalents at May 31, 2006.
Furniture, Equipment and Depreciation
Furniture and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
generally 3 to 7 years. Maintenance and repairs are charged to expense as
incurred and major improvements or betterments are capitalized. Gains or losses
on sales or retirements are included in the statement of operations in the year
of disposition.
F-8
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Impairment of Long-Lived Assets
The Company evaluates the carrying value of any long-lived assets under the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS 109). SFAS 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Research and Development
Research and development costs are expensed as incurred.
Earnings (Loss) per Common Share
Basic earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if potentially dilutive common shares had been issued.
At May 31, 2006, there was no variance between basic and diluted loss per share
as there were no potentially dilutive common shares outstanding.
Financial Instruments
At May 31, 2006, the fair value of the Company's financial instruments
approximate fair value due to the short-term maturity of the instruments.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with Accounting Principles Board ("APB") Opinion 25, "Accounting for
Stock Issued to Employees" and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise price. The
Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123. SFAS 123 requires the fair value based method of
accounting for stock issued to non-employees in exchange for services.
F-9
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Companies that elect to use the method provided in APB 25 are required to
disclose pro forma net income and pro forma earnings per share information that
would have resulted from the use of the fair value based method. The Company has
elected to continue to determine the value of stock-based compensation
arrangements under the provisions of APB 25. Pro forma disclosures are included
in Note 6.
Recent accounting pronouncements
In November 2004, FASB issued FASB Statement No. 151, Inventory Costs , which
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted materials by requiring those items to be recognized as current
period charges. Additionally, FASB Statement No. 151 requires that fixed
production overheads be allocated to conversion costs based on the normal
capacity of the production facilities. The new standard is effective
prospectively for inventory costs incurred in fiscal years beginning after June
15, 2005. We will adopt the FASB Statement No. 151 on January 1, 2006, and we do
not expect its adoption to have a material effect on our financial position,
results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29." This Statement eliminates the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
expect application of SFAS No. 153 to have a material affect on its financial
statements.
In December 2004, the FASB issued FASB Statement No. 123(R), Share-Based
Payment, which is a revision to FASB Statement No. 123, Accounting for
Stock-Based Compensation (FASB 123). FASB Statement No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. We
adopted the fair value based method of accounting for share-based payments
effective June 1, 2006 using the retroactive restatement method described in
FASB Statement No. 148, Accounting for Stock-Based Compensation -- Transition
and Disclosure. Currently, we use the Black-Scholes valuation model to estimate
the value of stock options granted to employees. We expect to adopt FASB
Statement No. 123(R) on June 1, 2006 and expect to apply the modified
prospective method upon adoption. The modified prospective method requires
companies to record compensation cost beginning with the effective date based on
the requirements of FASB Statement No. 123(R) for all share-based payments
granted after the effective date. All awards granted to employees prior to the
effective date of FASB Statement No. 123(R) that remain unvested at the adoption
date will continue to be expensed over the remaining service period in
accordance with FASB 123. We are still in the process of determining the impact
that the adoption of Statement No. 123(R) will have on our financial position,
results of operations or cash flows.
In June 2005, the FASB ratified the consensus reached in EITF Issue No. 05-5,
"Accounting for Early Retirement or Postemployment Programs with Specific
Features (Such As Terms Specified in Altersteilzeit Early Retirement
Arrangements)". EITF Issue No. 05-5 addresses the timing of recognition of
salaries, bonuses and additional pension contributions associated with certain
early retirement arrangements typical in Germany (as well as similar programs).
The Task Force also specifies the accounting for government subsidies related to
these arrangements. EITF Issue No. 05-5 is effective in fiscal years beginning
after December 15, 2005. The adoption of EITF Issue No. 05-5 is not expected to
have a material impact on our financial position, results of operations or cash
flows.
F-10
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes , which is effective for fiscal years beginning
after December 15, 2006. Earlier adoption is permitted as of the beginning of
the fiscal year, provided an enterprise has not yet issued financial statements,
including financial statements for any interim period, for that fiscal year.
FASB Interpretation No. 48 clarifies the accounting for uncertainty in income
taxes recognized in the financial statements by prescribing a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
new Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition The adoption of FASB Interpretation No. 48 is not expected to have a
material impact on our financial position, results of operations or cash flows.
We have determined that all other recently issued accounting pronouncements will
not have a material impact on our financial position, results of operations or
cash flows or do not apply to our operations.
(2) Property and Equipment
Property and equipment are as follows at May 31, 2006:
Equipment ...................... $ 2,816
Furniture ...................... 1,722
---------
Total ........................ 4,538
Less accumulated depreciation... (2,204)
---------
Net property and equipment... $ 2,334
=========
Depreciation expense for 2006 was $2,204
(3) Intangible Assets
Intangibles are as follows at May 31, 2006:
Website
---------
Cost ........................... $ 2,900
Less accumulated amortization... (1,772)
---------
Net intangibles .............. $ 1,128
=========
Estimated annual amortization expense at May 31, 2006:
Fiscal year ended
- ------------------------------
5/31/2007 967
5/31/2008 161
Amortization expense for 2006 was $967.
F-11
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
(4) Notes Payable
As of May 31, 2005, the Company had seven unsecured notes payable to
individuals, totaling $121,000. The notes were issued in February and March
2005, carried a 5% interest rate, and matured one year from the date of the
note. On August 29, 2005, the Company extinguished the outstanding promissory
notes and related accrued interest with the issuance of 160,110 shares of its
common stock and payment of $3,189 representing $3,172 in principal and accrued
interest and $17 in lieu of fractional shares.
Convertible Note Payable
During the year ended May 31, 2006, the Company issued convertible promissory
notes and warrants to purchase common stock to individuals in exchange for
proceeds totaling $509,500. The notes bear interest at five percent per annum
and mature in January and February 2007. Principal and accrued interest are
payable in any combination of cash and common stock of the Company at the option
of the lender. The Company can repay principal and accrued interest with common
stock at the rate of $1.25 per share. Accrued interest on the notes totaled
$5,267 at May 31, 2006.
The warrants to purchase common stock which accompanied the convertible
promissory notes are exercisable at $2.50 per share, vest immediately, and
expire in October 2010. Pursuant to APB No. 14, the Company valued the warrants
at their relative fair value of $274,950. To recognize the relative fair value
of the warrants, the Company discounted the notes and increased additional paid
in capital in the financial statements. The discount is amortized over the term
of the notes.
Pursuant to SFAS 133, options embedded in contracts containing the price of a
specific equity instrument are not clearly and closely related to an investment
in an interest-bearing note and the embedded derivative must be separated from
the host contract. As a result, the Company bifurcated the option resulting from
the conversion feature and classified it as a derivative liability pursuant to
SFAS 133. The following table presents the allocation of proceeds from the
financing:
Principal balance of convertible notes $ 509,500
Relative fair value of warrants (274,950)
Discount on relative fair value of debt (234,550)
Amortization of discount 105,331
Debt converted (437,500)
Unamortized discount on notes converted 356,032
-----------
Carrying value at June 30, 2006 $ 23,863
===========
During May 2006, convertible notes totaling $437,500 were converted to 350,000
shares of common stock. The Company recognized a loss on debt extinguishment in
the amount of $356,032.
(5) Derivative Financial Instruments
The Company generally does not use derivative instruments to hedge exposures to
cash-flow risks or market-risks that may affect the fair values of its financial
instruments. However, certain other financial instruments, such as embedded
conversion features which are not clearly and closely related to the debt host
contract, are classified as derivative liabilities. Such financial instruments
are initially recorded at fair value and subsequently adjusted to fair value at
the close of each reporting period.
F-12
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
As of May 31, 2006, the derivative liability is composed of the following:
Number of Shares
Derivative Liability
Can Be Settled
--------------------
Embedded conversion feature $ 75,456 57,600
A derivative loss in the amount of $355,590 was recognized immediately and a
derivative gain in the amount of $514,684 was recognized May 31, 2006.
(6) Related Party Transactions
As of May 31, 2005, the Company owed two officers promissory notes totaling of
$86,502. The notes are due on demand and carry no interest rate. On June 2,
2005, an officer advanced the Company an additional $5,000 for working capital;
on July 13, 2005, the Company repaid an officer $38,324; on August 31, 2005, an
officer advanced the Company $197; and on January 4, 2006, an officer advanced
the company $18,000. Management plans to repay the notes through cash payments,
issuance of the Company's common stock, or a combination thereof. The balance
due of $71,375 remained unpaid at May 31, 2006 and is included in the
accompanying condensed financial statements as "Indebtedness to related
parties".
A former director has provided legal services to the Company over the past
several years. As of May 31, 2005, the Company owed the former director $87,185
for legal services. During the year ended May 31, 2006, the Company incurred an
additional $13,800 in legal services and repaid the former director $30,000 and
extinguished $24,000 by issuing 60,000 options to purchase the Company's common
stock at $2.28 per share. The remaining balance of $46,985 is included in the
accompanying financial statements as "Indebtedness to related parties". As of
May 31, 2006, no arrangements had been made for the Company to repay the balance
of this obligation. The Company anticipates that the former director will
continue to provide legal services in the future.
The Company's former director, Peggy C. Pence, PhD., is the President and Chief
Executive Officer of Symbion Research International, Inc. ("Symbion"). On
January 5, 2005, the Company entered into a buy-sell agreement to purchase
certain intellectual property owned by Symbion. The agreement describes the
intellectual property in detail which summarized, is the Phase I clinical data
and the protocol for the Phase II study. This intellectual property is necessary
to obtain approval for, and to conduct, further FDA clinical tests of Cytolin.
Cytolin is a potential new drug being developed by the company for the treatment
of Human Immunodeficiency Virus ("HIV").
Under the terms of this agreement:
- The Company may purchase Symbion's Phase I clinical data in connection
with obtaining approval from the FDA to conduct the Phase II/Phase III
studies for Cytolin.
- The Company will grant 83,122 non-qualified stock options with an
exercise price of $.75 per share that will vest immediately and be
exercisable over 5 years.
- The Company will pay $25,000 to Symbion by February 10, 2005, 30 days
after execution of the agreement.
- The Company will pay $275,000 to Symbion once the Company's secondary
financing is received.
F-13
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
The Company paid Symbion $25,000 out of loan proceeds received in March 2005.
Although the payment was late, Symbion accepted it and the contract is in force.
The Company issued the above-referenced 83,122 non-qualified stock options on
March 20, 2006.
The results of the Phase II/III studies for Cytolin shall be the sole property
of the Company upon Symbion's receipt of the final payment called for by this
agreement. If all remaining payments are not received, the property shall revert
to Symbion. The balance due of $275,000 is included in the accompanying
financial statements as "Indebtedness to related parties".
(7) Shareholders' Equity
Preferred Stock
The Board of Directors is authorized to issue shares of preferred stock in
series and to fix the number of shares in such series as well as the
designation, relative rights, powers, preferences, restrictions, and limitations
of all such series. The Company had no preferred shares issued and outstanding
at May 31, 2006.
Common Stock Sales
The Company filed a Registration Statement on Form SB-2 with the SEC to offer
450,000 common shares for sale at a price of $.75 per share. The SEC declared
the Form SB-2 effective June 17, 2005. The Company completed its public offering
on July 31, 2005. The Company sold 289,890 shares of its common stock for net
proceeds of $189,550, after deducting offering costs totaling $27,867.
Common Stock for Services
During the year ended May 31, 2006, the Company issued 1,000 restricted common
shares to an individual for services performed in September 2005. The Company
valued the stock at the price it sold its shares at its public offering and
recognized $750 as stock-based compensation.
During the year ended May 31, 2006, the Company issued 142,857 restricted common
shares to a public relations company in accordance with an agreement to perform
services over the following year. The Company valued the shares at the bid price
on the date the agreement was executed in the amount of $250,000, of which
$86,473 was recognized as stock-based compensation and $163,527 is included in
prepaid expenses.
During the year ended May 31, 2006, the Company issued 40,000 restricted common
shares to a consulting company in accordance with an agreement to perform
services over the following year. The Company valued the shares at the open
price on the date the agreement was executed in the amount of $120,000, of which
$17,753 was recognized as stock-based compensation and $102,247 is included in
prepaid expenses.
Common Stock Awards
During the year ended May 31, 2004, the Company committed to grant to its
financial representative, J.P. Turner & Co. and Max O. Gould, an employee of
J.P. Turner & Co., warrants to purchase 426,000 shares of the Company's common
stock. The warrants carry an exercise price of $.30 per share, vest on the date
of grant and expire after five years from the date of grant. The warrants were
granted on November 25, 2004. On September 22, 2005, warrants to purchase 94,500
shares of the Company's common stock at $.30 per share were exercised. The
Company received proceeds of $28,350.
F-14
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
The Company's common stock had no traded market value on the date of grant. The
market value of the stock was determined to be $.30 per share based on
contemporaneous sales of common stock to unrelated third party investors. The
weighted average exercise price and weighted average fair value of these
warrants as of November 30, 2004 were $0.30 and $0.028, respectively.
The fair value for the warrants granted during the year ended May 31, 2005 was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Risk-free interest rate............................. 2.00%
Dividend yield...................................... 0.00%
Volatility factor................................... 0.00%
Weighted average expected life...................... 5 years
During the year ended May 31, 2006, the Company issued warrants to purchase
407,600 shares of the Company's common stock at $2.50 per share in conjunction
with its issuance of convertible debt. (See Note 4, above.) The Company
recognized the relative fair value of the warrants in the amount of $274,950 in
additional paid in capital.
On March 20, 2006, the Company issued non-qualifying options to purchase 200,000
shares of its common stock at $2.28 per share to consultants. The options vested
immediately and expire in ten years. The Company valued the options at $2.19 per
share using the Black-Scholes option pricing model and recognized $109,614 as
stock-based compensation. The Company also issued non-qualifying options to
purchase 60,000 shares of its common stock at $2.28 per share to extinguish
$24,000 debt to a related party. (See Note 5, above.)
On March 20, 2006, the Company issued non-qualifying options to purchase 340,000
shares of its common stock at $2.28 per share to directors and consultants.
Twenty-five percent of the options vested immediately and the balance vest 1/48
per month over four years. The Company valued the options at $2.19 per share
using the Black-Scholes option pricing model and recognized $209,648 as
stock-based compensation.
On March 20, 2006, the Company issued non-qualifying options to purchase 83,122
shares of the Company's common stock at $0.75 per share to a related party. (See
Note 5, above.) The options vested immediately. The Company valued the options
at $160,425 and recognized $98,084 as stock-based compensation and $62,341 as
debt reduction.
On May 15, 2006, the Company issued non-qualifying options to purchase 50,000
shares of its common stock 25,000 at $1.96 per share and 25,000 at $2.28 to
directors. Twenty-five percent of the options vested immediately and the balance
vest 1/48 per month over four years. The Company valued the options at $1.88 per
share using the Black-Scholes options pricing model and recognized $15,230 as
stock-based compensation.
The fair value for the warrants granted during the year ended May 31, 2006 was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Risk-free interest rate............................. 4.66%
Dividend yield...................................... 0.00%
Volatility factor................................... 72.30%
Weighted average expected life...................... 10 years
F-15
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
Stock Options - Employees
During May 2004, the Company granted 150,000 common stock options to an officer
with exercise prices ranging from $.50 to $1.50 per share. The Company's common
stock had no traded market value on the date of grant. The market value of the
stock was determined to be $.30 per share base on contemporaneous sales of
common stock to unrelated third party investors. The weighted average exercise
price and weighted average fair value of these options as of May 31, 2004 were
$1.00 and $.-0-, respectively. 50,000 options vest on May 10, 2005, an
additional 50,000 options vest on May 1, 2006, and the final 50,000 options vest
on May 1, 2007.
On March 20, 2006, the Company granted incentive stock options to purchase
85,000 shares of the Company's common stock with exercise prices ranging from
$2.68 to $2.95 per share. The Company's common stock traded at $2.68 per share
on the date of grant. The Company valued the shares at their intrinsic value
pursuant to APB No. 25, recognizing $-0- stock-based compensation.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 as if the Company had accounted for its granted stock options under the
fair value method of that Statement. The fair value for the options granted
during the fiscal year ended May 31, 2004 was estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate............................. 3.00%
Dividend yield...................................... 0.00%
Volatility factor................................... 0.00%
Weighted average expected life...................... 3 years
The fair value for the options granted during the fiscal year ended May 31, 2006
was estimated at the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
Risk-free interest rate............................. 4.66%
Dividend yield...................................... 0.00%
Volatility factor................................... 72.30%
Weighted average expected life...................... 10.00
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options prior to its public offering had
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options. The options granted in 2004 were determined to have $-0- fair value.
The Company has presented the pro forma net loss and pro forma basic and diluted
loss per common share using the assumptions noted above.
F-16
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
October 28,
For the Years Ended 2003
May 31, (Inception)
--------------------------- through
2006 2005 May 31, 2006
------------ ------------ ------------
Net loss, as reported $ (1,481,305) $ (777,083) $ (2,596,432)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects -- -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (50,909) -- --
------------ ------------ ------------
Proforma net income $ (1,532,214) $ (777,083) $ (2,596,432)
============ ============ ============
Basic and diluted earnings per share as reported $ (0.17) $ (0.12)
Basic and diluted earnings per share proforma $ (0.18) $ (0.12)
The following schedule summarizes the changes in the Company's outstanding stock
awards:
Awards Awards Awards
Outstanding Exercisable Exercisable Weighted
-------------- -------------- -------------- Average
Number of Number of Exercise Price Exercise Price
Shares Shares Per Share Per Share
-------------- -------------- -------------- --------------
Balance at May 31, 2005....... 576,000 476,000 $0.30 to $1.50 $ 0.48
Awards granted............. 1,050,722 726,510 $0.75 to $2.50 $ 2.72
Awards vested.............. - 50,000 $1.00 $ 1.00
Awards exercised........... (94,500) (94,500) $0.30 $ (0.30)
Awards cancelled/expired... - - - $ -
-------------- -------------- -------------- --------------
Balance at May 31, 2006....... 1,532,222 1,158,010 $0.30 to $2.50 $ 1.97
F-17
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
(8) Income Taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate is as follows:
2006 2005
---------- ----------
U.S. statutory federal graduated rate.... 34.00% 34.00%
State income tax rate,
net of federal benefit................. 3.06% 3.06%
Net operating loss for which no tax
benefit is currently available........ (37.06%) (37.06%)
---------- ----------
0.00% 0.00%
========== ==========
At May 31, 2006, federal and state deferred tax assets consisted of a net tax
asset of $534,985, which was fully allowed for in the valuation allowance of
$534,985. The valuation allowance offsets the net deferred tax asset for which
there is no assurance of recovery. The change in the valuation allowance for the
years ended May 31, 2006 and 2005 totaled $534,985 and $287,954. The current tax
benefits also totaled $534,985 and $287,954 for the years ended May 31, 2006 and
2005. The net operating loss carryforward expires through the year 2026.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
Should the Company undergo an ownership change as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the ownership change will be subject to an annual limitation,
which could reduce or defer the utilization of these losses.
(9) Commitments and Contingencies
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. filed a First Amended Cross-Complaint against CytoDyn of
New Mexico, Inc., (predecessor company) Allen D. Allen, Corinne E. Allen, Ronald
J. Tropp, Brian J. McMahon , Daniel M. Strickland, M.D. and unknown others
designated as "Does 101-150".
The Cross-Complaint was settled pursuant to a settlement agreement entered into
by the parties involved. The terms of the agreement are confidential.
In connection with that settlement, Mr. Lewis and Maya LLC were awarded by the
Los Angeles Superior Court attorneys' fees in the amount of approximately
$150,000. We have appealed the Court's order. The matter has not yet been
briefed. Management believes we have a strong basis to appeal. This judgement
has been accrued on the accompanying financial statements
F-18
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
(10) General and Administrative Expenses
General and administrative expenses consist of the following:
For The Years Ended
May 31,
-----------------------
2006 2005
---------- ----------
Salaries and payroll taxes...... $ 213,295 $ 154,879
Legal .......................... 182,412 116,801
Consulting ..................... 40,686 --
Other professional fees ........ 15,076 35,117
Patent fees .................... 28,997 18,299
Insurance ...................... 41,810 36,234
Office, travel, and other ...... 97,288 12,012
---------- ----------
$ 619,564 $ 373,342
========== ==========
(11) Litigation
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
- --------------------------------------------------------------------------------
Pharmaceuticals, Inc. v. Biovest International, Inc., Commonwealth of
Massachusetts, Superior Court, Worcester County, Civil Action No. 05-0452-C.
- --------------------------------------------------------------------------------
Nature of the claims:
The Company and Allen filed a complaint against Amerimmune, Inc. and Amerimmune
Pharmaceuticals, Inc. (together, "Amerimmune") to domesticate an October 4, 2004
judgment that the Company and Allen obtained against Amerimmune in the Superior
Court of California for Ventura County, case number SC-039250. Further, the
Company and Allen named Biovest International, Inc. ("Biovest") as a
trustee-defendant because Biovest possesses a Cell-Bank, the rights to which the
Company and Allen own.
Progress to Date:
The Company and Allen were successful in having the California judgment
domesticated. Further, the Company and Allen were successful in "charging"
Biovest and securing an order that Biovest transfer the Cell-Bank to the Company
and Allen. However, the transfer has not occurred because recently Amerimmune's
purported successor-in-interest, Maya, Inc. ("Maya"), intervened. Since CytoDyn
expects to make a new cell bank in any event, this action is opposed because it
is one part of an interstate scheme or artifice to convert our property. The
Company's Response:
The Company has a superior right to the Cell-Bank, and the Company intends to
litigate the matter vigorously..
Expected Outcome:
We cannot express judgment regarding the outcome of the case or the probable
ultimate liability, if any, to be incurred by the Company. However, the
Company's claim to the Cell-Bank is strong.
Other legal/patent issues:
Cytodyn has recently discovered that former employees of ex-licensee, Amerimmune
Inc., are attempting to convert technology previously adjudicated by the
Superior Court of California, County of Ventura to belong to Symbion Research
International, LLC. The technology involves LFA-1 Alpha subunit antibodies and
F-19
CYTODYN, INC.
(A Development Stage Company)
Notes to Financial Statements
the use of the antibodies to treat HIV-infected patients. Because of uncertain
consequences resulting from the actions of these rogue Amerimmune Inc.
employees, Symbion Research International is acting to remedy the situation. The
former employees have filed two U.S. patent applications and several foreign
patent applications based on a derivative international patent application.
Symbion Research International intends to correct the inventorship and assignee
in these applications.
Background
Cytodyn granted a license in its patented technology to Amerimmune Inc., which
represented that it would assist in obtaining FDA approval of Cytolin(R).
Amerimmune in turn contracted with Symbion Research International, LLC to assist
with the clinical trials of Cytolin(R). Symbion sued Amerimmune in 2003 in
Superior Court of California, County of Ventura asserting breach for non-payment
of services performed. Symbion prevailed in that suit and the Ventura Court
awarded title to all data and additional intellectuial property developed by
Symbion during its relationship with Amerimmune to Symbion. This additional
intellectual property is the subject matter of the patent applications filed by
the former employees of ex-licensee Amerimmune.
Maya LLC v. CytoDyn, et al
- --------------------------
Superior Court of Los Angeles Van Nuys Case # EC041590
- ------------------------------------------------------
Maya LLC filed an action in Van Nuys, California alleging a smorgasbord of
complaints against CytoDyn and two of its officers, some of which have been
dismissed on demurrer without leave to amend, some of which can be amended, and
some of which have been sustained but with a request from Maya's attorney that
CytoDyn's attorneys agree to an amended complaint. Management believes that
these events reflect a retaliatory and frivolous action on the part of Maya.
Although the outcome of litigation is uncertain, CytoDyn's in-house counsel
believes an outcome unfavorable to CytoDyn is highly unlikely .
(12) Subsequent Events
On July 17, 2006 we acquired Advanced Influenza Technologies, Inc. (AITI) as a
wholly owned subsidiary. AITI has licensed a portfolio of patents from the
University of Massachusetts for the development of a family of plasmid-DNA
products to protect human subjects against several strains of influenza (the
flu). The University has until [1 year from the effective date of the
contract--see and attach contract with Utek] to manufacture, successfully test,
and deliver to AITI three "seeds" that can be used for the commercial
manufacturing of plasmid-DNA products or, in the alternative, a single
polyvalent product, depending upon what the FDA might require. In the event the
University fails to make timely delivery of these seeds, AITI could then abandon
the project with no further financial obligations or could continue with a
different timeline.
F-20